Vismaya Pisharody

INTRODUCTION

In common parlance, the terms “insolvency” and “bankruptcy” are used interchangeably, but there is a significant difference between the two. Insolvency and bankruptcy are not synonymous. 

The term “insolvency” denotes the financial state which is caused due to the inability of an individual or company to pay off his debts as they become due in the ordinary course of business  The term “bankruptcy” denotes a legal status of a person or an entity who cannot  repay debts to creditors. Bankruptcy occurs when a court determines insolvency, and gives legal orders for it to be resolved.

Thus insolvency is a state and bankruptcy is the conclusion. The term insolvency is used for individuals as well as organisations/corporates. If insolvency is not resolved, it leads to bankruptcy in case of individuals and liquidation in case of corporates.

NEED FOR NEW LAW FOR INSOLVENCY & BANKRUPTCY

Prior to the enactment of the Insolvency and Bankruptcy Code, 2016, there were multiple overlapping laws and adjudicating forums dealing with insolvency and restructuring procedures of corporate entities, partnership firms and individuals. It was very complex, inadequate and time consuming. None of the laws provided for a strict time frame within which the process to resolve insolvency was to be completed. 

The provisions relating to insolvency and bankruptcy for companies were made in the Companies Act, 2013, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Sick Industrial Companies (Special Provisions) Act, 1985 and the Recovery of Debt due to Banks and Financial Institutions Act, 1993. The provisions relating to insolvency and bankruptcy of individuals were provided under the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920.

Keeping in mind the shortcomings of the previous legislation, the Insolvency and Bankruptcy Code, 2016 was enacted with an objective to “consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.”

INSOLVENCY & BANKRUPTCY CODE, 2016

On the recommendations of the Bankruptcy Law Reforms Committee, the

Insolvency and Bankruptcy Code, 2016 was enacted on May 28, 2016. The Insolvency and Bankruptcy Code, 2016 consolidates the existing framework by creating a single law for insolvency and bankruptcy. It provides a time bound process. It is one of the biggest economic reforms which promotes entrepreneurship and ease of doing business. 

The Insolvency and Bankruptcy Code, 2016 consists of 255 sections divided in five parts and 11 Schedules. Part I deals with the preliminary aspects which states the objects and applicability of the code and also the important definitions. Part II deals with insolvency resolution and liquidation for corporate persons whereas Part III deals with insolvency resolution and bankruptcy for individuals and partnership firms. Part IV makes provisions for Insolvency and Bankruptcy Board of India (IBBI), Insolvency Professionals, Insolvency Professional Agencies, Information Utilities and Adjudicating Authorities. Part V of the Code includes provisions for miscellaneous matters. 

Applicability of the Code

Section 2 of the Insolvency and Bankruptcy Code, 2016 as amended vide the Insolvency and Bankruptcy Code (Amendment) Act, 2018 provides that the provisions of the Code shall apply to –

1. any company incorporated under the Companies act, 2013 or under any previous company law, 
2. any other company governed by any special act for the time being in force, 
3. any Limited Liability Partnership incorporated under the Limited Liability

Partnership Act, 2008,

• personal guarantors to corporate debtors, 
• such other body incorporated under any law for the time being in force, as the

Central Government may, by notification, specify in this behalf, 

• partnership firms and proprietorship firms; and 
• individuals, other than persons referred to in clause (e)

Salient Features of the Code

1. Insolvency and Bankruptcy Code, 2016 is a uniform and comprehensive legislation dealing with insolvency and bankruptcy of companies, partnership firms and individuals.
2. The Code provides for a time bound insolvency process. 
3. The Code has introduced four pillar institutional framework consisting of Insolvency and Bankruptcy Board of India (IBBI), Insolvency Professionals (IPs) and Insolvency Professional Agencies (IPAs), Information Utilities (IUs) and Adjudicating Authorities (AAs). 
4. The Code provides the process for insolvency and liquidation in case of companies and LLPs and the process for insolvency and bankruptcy in case of individuals and partnership firms. 
5. The Code has made significant changes in the priority of claims for distribution of liquidation proceeds. 
6. The Code also provides for the creation of Insolvency and Bankruptcy Fund. A person who has contributed any amount in the Fund can, in the event of insolvency proceedings initiated against him, make an application for withdrawal of funds so contributed, for making payment to workmen, protecting his assets, meeting the incidental costs, etc. 
7. The Code also specifies penalties for certain offences. 
8. In case of cross-border insolvency proceedings, the central government may enter into bilateral agreements and reciprocal arrangements with other countries to enforce provisions of the Code.

PILLARS OF IBC, 2016

The Insolvency and Bankruptcy Board of India (IBBI) 

The Insolvency and Bankruptcy Code, 2016 provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (IBBI). It is a unique regulator which regulates a profession as well as processes under the Code. The Board oversees the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities. 

IBBI is a body corporate having perpetual succession and a common seal, with power, subject to the provisions of this Code, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.

The Board shall consist of the following members who shall be appointed by the Central Government-

• a chairperson;
• three members from amongst the officers of the Central Government not below the rank of Joint Secretary or equivalent, one each to represent the Ministry of Finance, the Ministry of Corporate Affairs and Ministry of Law, ex officio;
• one member to be nominated by the Reserve Bank of India, ex officio;
• five other members to be nominated by the Central Government, of whom at least three shall be the whole-time members.

Section 196 of the Code provides the various functions of the Board. It also empowers the Board to make model bye laws to be adopted by insolvency professional agencies. 

Insolvency Professionals (IPs) 

An insolvency professional is a person who has enrolled himself as the member of an insolvency professional agency and registered with IBBI as an insolvency professional. It is a class of regulated professionals and acts as intermediary in the insolvency resolution process. 

The IBBI has framed the IBBI (Insolvency Professional) Regulations, 2016 to regulate the working of Insolvency Professionals. 

An insolvency professional plays a very important role under the Code. He acts under the following capacity-

1. As an “interim resolution professional” and/or as a “resolution professional” in the corporate insolvency resolution process
2. As a “resolution professional” in the fresh start process or insolvency resolution process for individuals and partnership firms
3. As a “liquidator” in accordance with the provisions of Part II of the Code
4. As a “bankruptcy trustee” for the estate of the bankrupt under Part III of the Code

Insolvency Professional Agencies (IPA) 

Insolvency Professional Agency (IPA) is a person who is registered with the IBBI as an insolvency professional agency. They have been entrusted with the responsibility of regulating the Insolvency Professionals. These agencies enrol Insolvency Professionals, provide pre-registration educational course to its enrolled members and enforce a code of conduct for their functioning. Section 204 of the Code provides the various functions of IPA. 

The IBBI has framed the IBBI (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 and IBBI (Insolvency Professional Agencies) Regulations, 2016 to regulate the working of Insolvency Professional Agencies. 

Currently, following are the IPAs registered with the IBBI. 

1. The Indian Institute of Insolvency Professionals of ICAI
2. ICSI Institute of Insolvency Professionals 
3. Insolvency Professional Agency of Institute of Cost Accountants of India

Information Utility (IU) 

The Information Utility collect, collate, authenticate and disseminate financial information of debtors which helps in facilitating swift decision making in the resolution proceedings. They are also required to be registered with the IBBI. The IBBI has framed the IBBI (Information Utilities) Regulations, 2017 to regulate the working of the Information Utility. Section 214 of the Code provides the obligations of the Information Utility. 

Adjudicating Authority

The Adjudicating Authority for the insolvency resolution and liquidation for corporate persons is the National Company Law Tribunal (NCLT) whereas the Adjudicating Authority in case of insolvency resolution and bankruptcy for individuals and partnership firms is the Debt Recovery Tribunal (DRT). 

Appeals from NCLT orders lie to the National Company Law Appellate Tribunal (NCLAT) and thereafter to the Supreme Court of India. Appeals from DRT orders lie to the Debt Recovery Appellate Tribunal (DRAT) and thereafter to the Supreme Court.

CORPORATE INSOLVENCY RESOLUTION PROCESS

Part II of the Insolvency and Bankruptcy Code, 2016 deals with matters relating to the insolvency and liquidation of corporate debtors. 

• The minimum amount of default should be Rs.1 lakh. However, the Central Government may, by notification, specify a higher amount which shall not be more than Rs.1 crore. 

• Section 6 of the Code provides that in case a corporate debtor commits a default the following persons may file an application with the Adjudicating Authority for initiating corporate insolvency resolution process in respect of such corporate debtor-
  • Financial Creditor
  • Operational Creditor
  • Corporate Debtor itself

• According to Section 11 of the Code the following persons shall not be entitled to make an application to initiate corporate insolvency resolution process-
  • a corporate debtor undergoing a corporate insolvency resolution process or a pre-packaged insolvency resolution process; or
  • a financial creditor or an operational creditor of a corporate debtor undergoing a pre-packaged insolvency resolution process; or
  • a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
  • a corporate debtor in respect of whom a resolution plan has been approved under Chapter III-A, twelve months preceding the date of making of the application; or
  • a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
  • a corporate debtor in respect of whom a liquidation order has been made.

• Application has to be filed with Adjudicating Authority along with supporting documents proving the existence of default. The Adjudicating Authority shall within 14 days of receipt of application either accept or reject it. Before rejecting, the applicant shall be given 7 days to rectify any defect in the application. 

• The corporate insolvency resolution process shall commence from the date of admission of the application. It shall be completed within a period of 180 days from the date of admission of the application. The resolution professional shall file an application to the Adjudicating Authority for an extension if a resolution is passed at a meeting of committee of creditors by a vote of 66% of the voting share. On receipt of such application the Adjudicating Authority may by an order provide a one time extension for a period as it thinks fit but not exceeding 90 days. However, the corporate insolvency resolution process shall mandatorily be completed within a period of 330 days from the insolvency commencement date, including any extension and the time taken in legal proceedings in relation to such resolution process of the corporate debtor. 

• The Adjudicating Authority may allow the withdrawal of application for corporate insolvency resolution process on an application made by the applicant with the approval of 90% voting share of the committee of creditors.

• After admission of the application, the Adjudicating Authority shall declare moratorium, make public announcement of the initiation of the process and call for submission of claims, and appoint an interim resolution process.

• The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.

• The committee of creditors, may, in the first meeting, by a majority vote of not less than 66% of the voting share of the financial creditors, either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.

• The resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period.

• A resolution applicant may submit a resolution plan along with an affidavit stating that he is eligible under section 29A to the resolution professional prepared on the basis of the information memorandum. The resolution professional shall present to the committee of creditors for its approval such resolution plans which confirm the conditions referred to in Section 30 (2). The committee of creditors may approve a resolution plan by a vote of not less than 66%  of voting share of the financial creditors, after considering its feasibility and viability. The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority. 

• The Adjudicating Authority may either reject or approve the resolution plan. On approval, the resolution plan shall be binding on the corporate debtor and its employees, members, creditors including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan. The moratorium order shall cease to have effect. 

• The Adjudicating Authority shall pass an order of liquidation if-
  • It has not received any resolution plan within the time limit prescribed, or
  • It has rejected the resolution plan received
  • The resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than 66% of the voting share to liquidate the corporate debtor

INSOLVENCY    RESOLUTION    PROCESS FOR INDIVIDUALS    & PARTNERSHIP FIRMS

Part III of the Insolvency and Bankruptcy Code, 2016 deals with matters relating to the insolvency and bankruptcy of individuals and partnership firms. 

• The minimum amount of default should be Rs.1000. However, the Central Government may, by notification, specify a higher amount which shall not be more than Rs.1 lakh. 

• In case a debtor commits a default, the creditor or the debtor himself can submit an application either personally or through a resolution professional to the Adjudicating Authority for initiating the insolvency resolution process. 

• A debtor shall not be entitled to make an application under if-
  • he is an undischarged bankrupt;
  • he is undergoing a fresh start process;
  • he is undergoing an insolvency resolution process; 
  • he is undergoing a bankruptcy process.
  • an application under this Chapter has been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the application. 

• On the date of application, an interim moratorium period shall commence during which any legal proceedings with respect to such debts shall be stayed and no creditors shall initiate any action or proceeding in respect of such debts. 

• If the application is filed through a resolution professional, the Adjudicating Authority shall within 7 days from the date of application direct the Board to confirm that no disciplinary proceedings against such resolution professional. If the Board rejects such resolution professional, then it shall nominate another resolution professional. In case the application is filed by the debtor himself, then

the Adjudicating Authority shall within 7 days from the date of application direct the Board to nominate a resolution professional. The Adjudicating Authority shall by order appoint such nominated resolution professional. 

• The resolution professional shall, within 10 days of his appointment, examine the application and submit a report to the Adjudicating Authority, either recommending acceptance or rejection of the application. The Adjudicating Authority may, within 14 days from the date of submission of the report by the resolution professional, pass an order either admitting or rejecting the application. 

• On the date of admission of the application, the moratorium period shall commence in respect of all the debts. The moratorium ceases to have effect at the end of the period of 180 days beginning with the date of admission or on the date the Adjudicating Authority passes an order on the repayment plan under section 114, whichever is earlier.

• The Adjudicating Authority shall issue a public notice within 7 days of passing the order admitting the application for inviting claims from all creditors within 21 days of such issue. The resolution professional shall prepare a list of creditors within 30 days from the date of notice. 

• The debtor shall prepare, in consultation with the resolution professional, a repayment plan. The resolution professional shall submit the repayment plan along with his report on such plan to the Adjudicating Authority within a period of 21 days from the last date of submission of claims. 

• The resolution professional shall issue a notice calling the meeting of the creditors at least 14 days before the date fixed for such meeting. In the meeting

of the creditors, the creditors may decide to approve, modify or reject the repayment plan. The resolution professional shall ensure that if modifications are suggested by the creditors, consent of the debtor shall be obtained for each modification. The repayment plan or any modification to the repayment plan shall be approved by a majority of more than three-fourth in value of the creditors present in person or by proxy and voting on the resolution in a meeting of the creditors. The resolution professional shall prepare a report of the meeting of the creditors on repayment plan.

• The Adjudicating Authority shall by an order approve or reject the repayment plan on the basis of the report submitted by the resolution professional. The order of the Adjudicating Authority approving the repayment plan may also provide for directions for implementing the repayment plan. 

• On approval, the repayment plan shall be binding on the creditors mentioned in the repayment plan and the debtor. Where the Adjudicating Authority rejects the repayment plan, the debtor and the creditors shall be entitled to file an application for bankruptcy. 

• On the basis of the repayment plan, the resolution professional shall apply to the Adjudicating Authority for a discharge order in relation to the debts mentioned in the repayment plan and the Adjudicating Authority may pass such discharge order.

FRESH START PROCESS

Part III of the Insolvency and Bankruptcy Code, 2016 deals with matters relating to the insolvency and bankruptcy of individuals and partnership firms. It has introduced a new concept of fresh start process wherein the eligible debtors are discharged from certain debts within a specified threshold and can start afresh without any liabilities. 

• Section 80 of the Code provides the condition which needs to be fulfilled by the debtor to become eligible for fresh start process. 
  • The gross annual income of the debtor does not exceed Rs.60,000;
  • The aggregate value of the assets of the debtor does not exceed Rs.20,000; 
  • The aggregate value of the qualifying debts does not exceed Rs.35000; 
  • He is not undischarged bankrupt; 
  • He does not own a dwelling unit, irrespective of whether it is encumbered or not; 
  • A fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him; and
  • No previous fresh start order has been made in relation to him in the preceding 12 months of the date of the application for fresh start.

• A debtor who is unable to pay his debt and fulfils the conditions may apply to the Adjudicating Authority, either personally or through a resolution professional, for a fresh start in respect of his qualifying debts.

• On the date of application, an interim moratorium period shall commence during which any legal proceedings with respect to such debts shall be stayed and no creditors shall initiate any action or proceeding in respect of such debts. 

• If the application is filed through a resolution professional, the Adjudicating Authority shall within 7 days from the date of application direct the Board to confirm that there is no disciplinary proceedings against such resolution professional. If the Board rejects such resolution professional, then it shall nominate another resolution professional. In case the application is filed by the debtor himself, then the Adjudicating Authority shall within 7 days from the date of application direct the Board to nominate a resolution professional. The Adjudicating Authority shall by order appoint such nominated resolution professional. 

• The resolution professional shall, within 10 days of his appointment, examine the application and submit a report to the Adjudicating Authority, either recommending acceptance or rejection of the application. The Adjudicating Authority may, within 14 days from the date of submission of the report by the resolution professional, pass an order either admitting or rejecting the application. 

• On the date of admission of the application, the moratorium period shall commence in respect of all the debts. The moratorium ceases to have effect at the end of the period of 180 days from the date of admission unless the order admitting the application is revoked. 

• A copy of the order along with a copy of the application shall be provided to the creditors mentioned in the application within 7 days from the date of passing of the order. The creditors can raise objections by filing an application with the resolution professional within 10 days from the date of receipt of the order. The resolution professional shall examine the objections and either accept or reject the objections, within 10 days from the date of such application.

• The debtor or the creditor who is aggrieved by the action taken by the resolution professional may, within 10 days of such decision, make an application to the Adjudicating Authority challenging such action. The Adjudicating Authority shall decide the application within 14 days of such application, and make an order as it deems fit.

• Where the debtor or the creditor is of the opinion that the resolution professional is required to be replaced, he may apply to the Adjudicating Authority for the replacement of such resolution professional.

• The resolution professional may submit an application to the Adjudicating Authority seeking revocation of its order on the following grounds-
  • If due to any change in the financial circumstances of the debtor, the debtor is ineligible for a fresh start process; or
  • Non-compliance by the debtor of the restrictions imposed under sub-section

(3) of section 85; 

• if the debtor has acted in a mala fide manner and has wilfully failed to comply with the provisions of this Chapter.

The Adjudicating Authority shall, within 14 days of the receipt of the application may by order admit or reject the application. On passing of the order admitting the application, the moratorium and the fresh start process shall cease to have effect.

• The resolution professional shall prepare a final list of qualifying debts and submit such list to the Adjudicating Authority at least 7 days before the moratorium period comes to an end. The Adjudicating Authority shall pass a discharge order at the end of the moratorium period for discharge of the debtor from the qualifying debts mentioned in the list. 

CASE LAWS 

Surendra Trading Company vs Juggilal Kamlapat Jute Mills 

The Supreme Court held that the provision of removing the defects in an application within seven days is directory and not mandatory in nature. The court clarified that while interpreting the provisions to be directory in nature, if the objections are not removed within seven days, the applicant while refiling the application after removing the objections, file an application in writing showing sufficient case as to why the applicant could not remove the objections within seven days.

Indiabulls Housing Finance Ltd. V. Shree Ram Urban Infrastructure Ltd.

In this case, it was held by the NCLAT that since the High Court has already ordered winding up of the corporate debtor and the same has been initiated, therefore, an application for initiating Corporate Insolvency Resolution Process against the corporate debtor is not maintainable.